The Ethics of Bootstrapping

At no time is there more pressure to cut ethical corners than when your company's survival -- and your own economic well-being -- is at stake

Scott Cook founded Intuit, maker of the check-writing-software product Quicken, in 1984 with $151,000, after being turned down by venture capitalists for the $2 million he thought he would need. The start-up cash was quickly exhausted on product development, and the Menlo Park, Calif., company scraped through three desperate years before hitting its stride. Today Intuit has 400 employees. Sales last year were $44 million, and this year's revenues are expected to reach $80 million. Despite dozens of competitors in this category, Intuit has over a 70% market share.

This article is derived from conversations between Cook and associate editor Leslie Brokaw.

When you're a little, struggling start-up, you're confronted by ethical questions almost every day. Your company has no visible track record, or a very limited one. Or, like us in our early years, a very shoddy one. We had a poorly selling product for several years, we had no money, and our two closest competitors were corporate subsidiaries that together spent $7 million on marketing during our launch year alone.

That's the test of your ethics, when you're staring straight at the shame of failure. Each week your ethics are challenged by the promises you make. How much do you embellish your financial condition, the resources behind you, the success of your customers? What do you tell employees? Prospects? To get the sale, do you promise things you know you can't deliver? Do you make promises to your employees that you know in your heart you can't keep? I found I couldn't do those things. I just couldn't get my enthusiasm up for it; I had to do what felt right. Of course, no one would argue that businesspeople should do otherwise. But they do do otherwise, all the time. Because it's business we're talking about, and because it's cutthroat and you can rationalize almost anything, and because -- especially when you're bootstrapping as we were -- it's a matter of survival.

But what I've learned, and what all too many bootstrappers can miss, is that being truthful is good business. Apart from moral judgments, consider expediency -- and expediency is what bootstrapping amounts to. Business is about doing right by the customer and by your business partners, which include vendors and employees. If you do right by them, your business will flourish. If you don't, your business won't. You may solve some temporary bind by fibbing, but it will come back to haunt you. It's not just wrong; it also doesn't work. Being ethical isn't a fairyland, Boy Scout idea, nor is it naïve. I wanted to build a business for the long term. And trust is one of the most important sources of your power.

Let me give you an example. We sell our software to retailers and dealers, who resell it to their customers, the end-users. It is common in our industry, as in a lot of industries, for salespeople to "load" the dealer with too much product. There is an old slogan, "a loaded dealer is a loyal dealer," because he won't want to push the competitor's product until he gets rid of yours first. With that in mind, some companies invent elaborate schemes to get dealers to buy more than they need; their salespeople overstate demand, exaggerating how well their product is going to sell or how big a promotion is.

Well, we don't do that. We don't think it's right to tell dealers they're going to sell 100 units a month when they're really going to sell 40 -- or, in our case with the major chains, 10,000 units when 4,000 is more like it.

Is this an issue of ethics or smart business? Frankly, I think the two merge. Although it means we sometimes miss higher revenues at the end of a quarter -- that's why other companies load dealers, to maximize numbers so salespeople can get their commission checks or show off to the president -- in the long run, being honest has served us better. For one thing, if you produce a large chunk of product and then don't get orders for three months, your manufacturing facility sits idle. That kind of boom-and-bust cycle is inefficient -- it's hell on manufacturing people, who find it much easier to produce a level, constant volume of product.

We'll actually tell accounts they've ordered too much, that we'd like to ship them less because we think they're overbuying. And because of that, they've started to trust us in surprising ways. When we launch a new product -- we've brought out three in the last year -- we get into all the chain stores instantly. They don't even question it, because they know we're not going to screw them. What's more, many of the accounts now say, "We trust you, how much should we order?" Normally that would never happen. They would try to figure it out themselves, or they'd ask the salesperson and cut that recommendation in half. Instead, they're relying on our advice in ways that are very untypical for chain-store buyers and very helpful in building long-term partnerships.

It's amazing how uncommon it is to think about sales that way; so many companies seem to be out to snooker dealers as much as possible. That attitude is everywhere, probably because managing a company for short-term revenue is so much easier. It's all in the numbers. If the revenues aren't there, some presidents yell a lot, and people learn to run around and get short-term sales. Those presidents tell their people, "I don't care if the demand isn't there, go and sell them." That's easy; any idiot can do that. And many idiots do.

Ethical temptations continue to come up for us. For instance, we offer a consistent price to all our major accounts; it's the best price we can afford. But some of those accounts will call and say, "Hey, if you knock 5% off your price, I'll place a big order right now." Well, more volume is better, especially for a bootstrapped company, right?